NMIMS BANKING ASSIGNMENTS

Treasury Management in Banking

1. Explain the various approaches to measure risks. As a treasury manager of a bank, which approach will you follow to evaluate stress events of liquidity position of your bank. 10 Marks

2. Explain duration GAP analysis in banks. Calculate the duration Gap of the following excerpts from the balance sheet of a bank. Also calculate the impact on the equity of the bank in the different interest rates scenarios.

Balance Sheet for

Hypothetical Bank

Particulars Assets Duration

Liabilities

Duration

Current Assets 1000 7 years

Current

Liabilities 700 5 Years

Fixed Assets 300

Other Liab. 300

1300 Equity 300

1300

Scenarios for Impact analysis:

1. Interest rates increased by 1%

2. Interest rates decreased by 1%

10 Marks

3. Maruti Suzuki Ltd. has imported machinery worth 1 million USD and the invoice is payable in 90 days. Current Spot rate in the market is USD/INR 75 while 90 Days forward is quoted at USD/INR 76. The prominent economists predict the spot rate after 90 days at USD/INR 76.5. Cost of Borrowing for Maruti in India is 10% and USD Interest Rate 2%. A 90 days Call option with exercise price of USD/INR 75 for 100,000 USD is available at premium of INR 2.

You are required to calculate impact on transaction exposure under following scenarios:

a. Company decides to use Forwards & Options for hedging 5 Marks

b. Company decides to use Money Market hedging 5 Marks

International Banking & Foreign Exchange Management

1. Mumbai Ltd. is an Indian company, they are in process of raising a US dollar loan and are negotiating rates with City Bank. The Company has been offered a fixed rate of 7% p.a with a proviso that should they opt for a floating rate, the interest rate is likely to be linked to the bench mark rate of 60 basis points over the 10 year US T Bill Rate, with interest refixation on a three monthly basis. The expectations of Mumbai Ltd. are that the dollar interest rates will fall, and are inclined to have a flexible mechanisms built into their interest rates. On enquiry they find that they could go for swap arrangement with Chennai India Ltd. who have been offered a floating rate of 120 basis points over 10 year US T Bill Rate, as against a fixed rate of 8.20%. Describe the swap on the assumption that the swap differential is shared between Mumbai Ltd. and Chennai India Ltd. in the proportion of 2: 1. 10 Marks

2. XYZ Ltd. Is planning to import a multi-purpose machine from Japan at a cost of 3400 lakhs yen. The company can avail loan at 18% interest per annum compounded quarterly with which it can import the machine. However, there is an offer from Tokyo branch of an India based bank extending credit of 180 days at 2% per annum against opening of an irrevocable letter of credit. Other information: -

Present exchange rate Rs. 100 340 yen

180 days forward rate Rs. 100 345 yen Commission charges for letter of credit at 2% per 12 months. Advise whether the offer from the foreign branch should be accepted 10 Marks

3. Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to &euro4 million with a large German retailer on 6 months credit. If successful, this will be the first time that Nitrogen Ltd has exported goods into the highly competitive German market. The following three alternatives are being considered for managing the transaction risk before the order is finalized.

i. Invoice the German firm in Sterling using the current exchange rate to calculate the invoice amount.

ii. Alternative of invoicing the German firm in &euro and using a forward foreign exchange

contract to hedge the transaction risk.

iii. Invoice the German first in &euro and use sufficient 6 months sterling future contracts to the nearly whole number to hedge the transaction risk. Following data is available:

Spot Rate &euro 1.1750 - &euro1.1770/£

6 months forward premium 0.55-0.60 Euro Cents

6 months future contract is currently trading at &euro1.1760/£

6 months future contract size is £62500

Spot rate and 6 months future rate &euro1.1785/£

Required:

a. Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three proposals. 5 Marks

b. In your opinion, which alternative would you consider to be the most appropriate and the reason thereof. 5 Marks